What’s Your IT IQ?

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With the invention of the first electronic spreadsheet, finance folks were dragged — sometimes kicking and screaming — into the forefront of corporate technology management. And despite the ongoing debate over whether and when the CIO should report to the CFO, the signs suggest that for the next few years anyway, technophobic finance executives are out of luck.

Indeed, according to a survey by Menlo Park, California-based Robert Half International Inc., 82 percent of finance chiefs say their accounting departments have become more involved in technology initiatives in the past five years. A full 52 percent say IT is their top priority in training their staff. This applies at larger companies as well as at smaller firms, where the CFO has traditionally assumed the CIO role.

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At Delta Air Lines Inc. in Atlanta, for example, the CIO reports to the CEO, but CFO Michele Burns heads Delta Technology, the airline’s IT subsidiary. At Burger King, incumbent CIO Tom Giordano actually left the company when new CFO Bennett Nussbaum was hired, since the CFO will oversee management information systems, among other areas. Furthermore, in today’s shaky economy, and with more than 70 percent of U.S. companies scarred by costly technology missteps, CFOs are increasingly expected to evaluate the ROI potential of any new technology investments.

But does this mean all finance executives need to become propeller heads? Not quite. “What is required is a degree of discernment so that you’re not always jumping on the new technology bandwagon,” says Craig Watson, who in 1998 became the first corporate CIO at $3.9 billion FMC Corp. after stints as a divisional CFO at the Chicago-based chemical maker and at PepsiCo. (He is now president of Payment Engineering.)

“Vendors of, say, procurement systems will tell you their systems save you 30 percent on indirect goods,” he continues. “It’s very important to understand that 80 percent of that cost reduction is derived from better understanding your spend and rationalizing your supplier base, which has nothing to do with technology.”

Applying Due Diligence

The good news for finance executives is that discernment about new technologies involves a skill that is already associated with traditional due-diligence processes: asking the right questions of the right people.

And due diligence is critical when it comes to evaluating the vendor’s financial stability. “You can’t afford to get into bed with a vendor who’s not going to be around in two years,” says Richard Lester, CFO of Portland, Maine-based IntelliCare Inc., a provider of patient communications systems for the health-care sector. In the company’s current search for a new telephony vendor, the CIO is creating the specs and issuing an RFP, but Lester is helping to narrow the list of finalists with some standard financial due diligence. “We’re considering start-ups and mature companies, but the key thing is whether we think they’ll be around to support their products,” he says.

The first questions Digital Insight Corp. CFO Kevin McDonnell asks when he’s presented with a new vendor are, “Who’s backing them?” and “Who’s the management?” This line of questioning has led him both to established players, such as Great Plains Software, and to several start-ups, depending on the business needs of his company and the viability of the vendors.

Last year, for example, in the wake of three acquisitions that quadrupled the employee population, McDonnell needed to buy a new purchasing system very quickly. But he knew the Calabasas, California-based firm “wasn’t in a position to buy a million dollars’ worth of software, which is what it would have taken to get [E-procurement giant] Ariba.” So instead he agreed to be the first Ariba customer for E-commerce application service provider CoreHarbor Inc., a Norcross, Georgia-based start-up, largely because CoreHarbor was founded and led by Jay Chaudhry, a respected entrepreneur who had successfully launched two other companies and sold one to VeriSign.

Penetrating Vendor Hype

Of course, the financial viability of the vendor is only the first issue. Figuring out whether the system will function as anticipated often proves far more complex, requiring the CFO to obtain clear and honest assessments from both vendors and prospective users.

Just ask Thomas Steinberg, CFO of $30 million Chicago-based Allied Hospitality Group Inc., which manages 12 hotels throughout the United States. Steinberg had an experience with a previous company in which, after allocating $60,000 to automate sales and catering data in 1995, he found that users “didn’t understand the functionality of the tool, and were not committed to making it work,” an attitude that made the vendor defensive and uncooperative.

While the problems were eventually resolved, he says, he was “left holding the bag” far longer than he would have liked. Now, Steinberg leans on his recently formed internal tech team to help spot potential implementation problems with such items as online reservation systems, digital subscriber line connections, and wireless room phones. But he also relies on a network of colleagues from Hospitality Financial & Technology Professionals, a professional association, and makes a point of attending the group’s annual conference. “You see how fast things are changing — often what’s a very hot product one year is hardly mentioned the next,” he says.

Becoming a High-Tech CFO

Certainly, more-specific IT knowledge is necessary at companies where technology decisions directly affect the company’s strategy. At Boston-based mobile software application developer Isovia Inc., Peter Phelps says his demonstrated interest in the details of enterprise software development gave him the edge over other candidates for the CFO job last spring. “I found my background in IT was a major differentiator, because it meant I had no learning curve,” he says. “If you don’t have a foundation of IT knowledge, the CTO can’t even explain the business issues to you; he won’t have the patience.” Phelps, who has long had a fascination with computers and previously worked for two other high-tech start-ups, says he made sure to inject informed questions — like “How many lines of code do you currently have?” — into his prehire interviews. “It’s not like they give you a test, but the dialogue usually reveals how much someone knows.”

But even Phelps admits that advancing his understanding of technology requires a dedication to ongoing self-education. He says he “religiously” reads about 20 monthly technology magazines, and spends two to three hours per week with his CTO. “This kind of knowledge is also very effective in sales calls, when I try to explain our products to other CFOs, who ultimately decide whether or not to buy,” he notes.

CFO vs. CIO

As technology decisions mushroom in importance, there’s some evidence that CEOs are more willing to lighten the CFO’s load. “There’s just too much to know too quickly as a CFO, especially with the rate at which technology is changing,” says Doug Tatum, who recently launched Atlanta-based Tatum CIO Partners LLP to shore up the eponymous CFO partnership he founded in 1993. IntelliCare CEO Victor Otley, who hired CFO Lester and a new CIO concurrently last summer, agrees: “We wanted a CFO who understood the operating side of our business and the markets we were going into — IT familiarity was less important, since we had a very strong CIO.”

Of course, this also creates something of a turf war. The question of whether the CIO should report to the CFO is still fair game to discuss in job negotiations, recruiters say. Currently, about 50 percent of CIOs report to CFOs, with around 30 percent reporting to CEOs and the balance reporting to other officers, according to a recent Financial Executives International survey, consistent with results from the previous three years.

But how the reporting relationships ultimately shake out may depend more on how thick the line is between internal IT needs and the company’s products than on the strength of the CFO. CFO Mark Bonavia, for example, had enough IT experience from his days as a Deloitte & Touche consultant to warrant the American Institute of Certified Public Accountants’s new Certified Information Technology Professional accreditation without even having to sit for the exam. However, when he joined E-procurement technology developer Supplycore.com last year, he says there was little debate about the CIO reporting to him. While the CFO is certainly involved in IT strategy and some projects, “it was a mutual decision that IT was so critical to the success of this organization that it had to be reporting to the president,” he says. “In a dot-com environment, it’s the only organizational structure that makes sense.”

Alix Nyberg is a staff writer for CFO.

Tips for Negotiating with Vendors

Tie payments to the achievement of milestones, such as successful implementation.

Include a detailed description of all testing required, such as code walk-throughs and integration testing, in the contract.

Specify that “acceptance” will occur only after implementation and successful testing.

Spell out what type of ongoing support the contract price will cover, and what will entail extra charges.

Source: Saul Ewing LLP

How to “Boot Up” Your IT Knowledge

One way to stay on top of IT changes is to maintain a steady diet of technology reading, including industry magazine and analyst reports. Another is to attend technology “boot camps.”

FMC Corp. CIO Craig Watson, for example, took a five-day, customized session organized by consulting firm Gartner when he made the leap from CFO to CIO. The camp he attended was from 8 a.m. to 6 p.m., with 60-to-90-minute, one-on-one analyst sessions. “As a result of that program,” says Watson, “I was fairly comfortable with the lingo and how things fit together.”

Information Week and Stanford University jointly offer a five-day program addressing technology’s role in finance and other areas of business at least once a year.